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LONDON (Dow Jones) --Despite the hoopla over the creation of Europe's biggest stock market through the London Stock Exchange's planned takeover of Borsa Italiana, the merger's success might hinge instead on the future of Europe's bond markets.

Key is the ability of the LSE to exploit the MTS wholesale bond-trading platform.

Indeed, getting control of MTS is a far more important strategic coup for the London exchange that linking up with one of the most leaden-footed of European stock markets, despite Milan's prominence as a top European financial centers, in all the recent jockeying for position among the region's bourses.

Mercato Telematica dei Titoli di Stato, to give it MTS its full name, dominates the inter-dealer government bond market in Italy, Belgium, Holland and Spain and France.

So it gives the LSE an entry to the world of bond trading otherwise dominated by ICAP, a former LSE suitor, and its BrokerTec unit, and the likes of eSpeed for the OTC markets, and Deutsche Boerse's Eurex and NYSE Euronext's Liffe when it comes to exchange-traded fixed-income derivatives.

It may be that the growth potential in European financial markets is to be found in bonds. According to Celent, the financial services technology consultants, only 4% of European bond trading volumes go through exchanges.

That's much smaller compared with the U.S. where pension funds and insurance companies are active bond investors and have helped create a vibrant, liquid exchange-traded bond market.

In Europe, the market is mostly in government paper, with trading largely among banks. Duplicating MTS's success in government bonds in corporate bonds is one challenge for the LSE.

But the LSE is yet to get full control of MTS by exercising Borsa Italiana's option to buy out the 51% stake currently owned by NYSE Euronext. The option may have been triggered when NYSE bought Euronext - the situation is unclear. If not, ICAP's designs on MTS might yet complicate matters.

The LSE is also paying up for the goodwill of the Italian financial community. Italian banks are big users of MTS given the liquidity of the Italian government debt market and key investors in Borsa Italiana.

Of course, the extra value for the LSE is that the deal dilutes Nasdaq's shareholding in LSE and brings an incremental and diversified earnings stream to make the LSE's current market rating look less stratospheric.

Longer term, if the LSE can duplicate the role it has played in helping foster a share-owning culture in the U.K. and encouraging many small companies to go public - by livening up the U.K.'s fixed-income markets - and use MTS to further its European ambitions, then this deal might be worth the high price the LSE has paid.

(Arindam Nag has covered business and finance for 16 years in Asia, Europe and the United States. He can be reached at +44 207-842-9289 or by e-mail: arindam.nag@dowjones.com)